Coin Collecting

Are you the type of person who picks up coins on the street? Even pennies? Well, I’d encourage you to step up the habit — and the rest of you may want to take up this hobby, at least for the next few weeks.

Ally Bank has a fun scavenger hunt promotion going on right now, called Ally Lucky Penny. They minted 100 special pennies and dropped them in each of ten metropolitan cities. Since doing so last month, Ally has been giving out little clues as to where you can find these copper coins.

The pennies were dropped in Washington, DC (so believe me, I’m also on the lookout) as well as San Diego, Los Angeles, Charlotte, New York City, Chicago, Detroit, Denver, Austin, Miami. Each city had a total of ten coins dropped in random locations, but keep in mind that coins move. So, just because one of the town’s hints says it’s in a park somewhere, doesn’t mean it hasn’t been inadvertently moved across town (or even to another city!). It’s probably wise to go ahead and check your coins each time you get change, no matter where you live, just in case one of these pennies winds up in your pocket.

So, what happens if you end up with one of the special pennies? You’ll need to take it into an Ally Bank, and in exchange, they will give you a 100,000% return… or $1,000 in cold, hard cash. Not a bad deal, just for checking the jingle in your change purse.

But be on the lookout now, as this promotion only goes through December 31, 2016. For more information, rules, and city-specific clues, visit AllyLuckyPenny.com. Good luck!

My memory may be fuzzy when I think back to when I was five or six years old, but one thing that stands out is my grandmother’s house in Queens, New York. She had a coffee grinder full of pennies, and I’d enjoy looking through this collection, placing the best-looking coin of each date and mint mark into blue coin folders.

Somehow, after moving to and from college in later years, the folder containing the oldest and most rate of these coins disappeared, and when I have the chance, I occasionally look through coins to try to rebuild this collection. I’ve also started collecting other coins.

Coin collecting is said to be the “hobby of kings.” It’s a gateway to history. It’s even possible for the hobby to be profitable, but it doesn’t look like that will ever be the case for me. If anyone is making money from coin collections and collectors, it’s the professional dealers who get special pricing favors from other dealers and sell to the public for profit. Dealers can also sell the public’s collections as brokers or buy coins directly for customers, another source of revenue. The individual collector is at a disadvantage.

The U.S. Mint has been involved in the collecting market almost one hundred years. What makes a coin worth more than its face value (or in some cases, melt value) is its rarity and condition. A century ago, there were few collectors and the Mint produced much lower numbers in terms of coin volume. The Mint produced coins to suit the needs for circulation, but as coin collecting grew in popularity, the Mint saw it as an avenue of profit, creating new coins designed just for collectors and encouraging the industry.

Today, the Mint produces more coins and enough collectors keep everything made by the Mint in pristine condition. No new coin will ever be rare again unless the Mint produces something with an extremely limited run. And if the Mint were to do this, collectors would snap up the issue, the coins would not be placed into wide circulation, and the few specimens will be kept in “mint” condition.

Every year I buy a set of proof coins from the Mint, showcasing the designs in the Mint’s own packaging. The Mint produces so many of these and collectors keep almost all of them perfect condition. There is little likelihood of these sets ever being worth much more than the purchase price, and in many cases, the street value could actually be lower than the purchase price. I am not looking for profit right now, just the satisfaction of building a collection that I could, possibly, one day share with someone.

Modern coins offer little for the collector concerned with earning a living from the coin collecting industry, but old coins, produced when the Mint kept volumes low enough for circulation and before every type of coin was automatically saved in pristine collection, can be profitable. Dealing with old coins is more like dealing with works of art. A small number of specimens go from auction house to auction house, increasing in price, while a larger number of old and rare coins at auction don’t sell at all. The prices of these rare and most profitable specimens are out of range for the casual collector.

Nevertheless, the idea of coin collecting has a public transfixed with the possibility of making a fortune or creating a legacy of monetary value to share within the family. The Mint will be happy to feed that perception as it continued to profit significantly from investors who buy any new product (or repackaging of an existing project) for the sake of completeness. The latest new product from the Mint, a Limited Edition Silver Proof Set which includes fewer coins than the already existing annual silver proof set, is a good example of how the Mint uses repackaging to create demand among collectors. There is nothing unique about these coins, only the packaging, of which only 50,000 will be produced.

Moves like this will stimulate some demand, but it will most likely dry out quickly. The coins themselves are minted in such numbers they will never be rare and almost the entire population of coins will be in perfect condition for hundreds of years.

For the non-professional, non-dealer collector looking to use coin collecting as a way to build wealth, modern coins will offer no such assistance. Even focusing on old coins has limited results because collectors have now preserved what could possibly exist in the marketplace. And every so often, the Mint throws the industry for a loop by releasing into the public a collection of coins held in a vault somewhere, making what was formerly a rare coin just one of many. This is what happened with certain old dollar coins (called Morgan dollars, after the designed of the image on the coins). The Mint released bags of coins formerly thought to be rare. With the coins no longer rare, the price plummeted. With the market easily manipulated by the Mint, you can never be sure how the value of your coins will be sustained over the long-term.

Despite the volatile market and likelihood for loss rather than profit, coin collecting can still be fun and educational. Every collector has a story about how he or she started or about a younger person they’ve inspired to learn about history through sharing love for the hobby. From a financial and business perspective, casually collecting modern coins is dead, but some of the better aspects of the hobby continue to live on.

Throughout recent American history, the metals used by the U.S. Mint to create coins for circulation have increased in value relative to the currency. As a result, at certain points, the Mint changed the metal composition of coins to ensure the government would still make money on production. In 1982, when the amount of copper contained in a cent was valued over $0.01, the Mint replaced copper with zinc. Today, the copper in these pre-1982 cents is worth $0.027 by weight. The metal composition of a nickel is worth $0.062, a smaller premium over the face value. It’s safe to expect the Mint will eventually change the composition of the nickel so the government makes money on each nickel minted.

Collecting — or even hoarding — these coins may seem crazy, but if your parents or grandparents held onto silver dollars, half-dollars, and quarter-dollars after the composition of these items shifted to more affordable alloys, you might have inherited coins now deemed to be valuable. The value is due not only to the value of the metal, but if the coins are in exceptional condition or are rare, they’ll have an additional value to collectors above the value of the metal.

If you have the space, consider holding onto these coins when you find them. There are a few things that could happen when you do:

The government will change composition on the coins to keep them more affordable, and demand among collectors will increase for the coins with the older composition. If you stay ahead of this curve, it could pay off. Supply will never increase.

The government will begin to allow melting of copper and nickel. This will decrease supply because many collectors will prefer to melt and cash in their investment. The coins that aren’t melted will increase in value as their rarity increases.

The government could decide to cease minting cents and nickels altogether, as the value of $0.05 continues to play a smaller role in everyday personal economics. Cents and nickels will be removed from circulation, increasing the value of those that remain among collectors.

It seems that in every possible future situation, it make sense to start holding onto coins whose base metal value exceeds the face value and market value. Holding onto silver coins when the government moved away from using silver in circulating coins seemed unlikely to pay off at the time. With silver at $35 an ounce today rather than $1, and with the best specimens of silver coins potentially having a much higher value to collectors than $35 an ounce, many collectors wish they had maintained a better silver collection in the 1960s.

Coinflation lists the base metal values for coins. Here they are, as of June 2, 2011:

Description

Denomination

Metal Value

Metal % of Denomination

1909-1982 Cent (95% copper)

$0.01

$0.0270840

270.84%

1946-2011 Nickel

$0.05

$0.0623513

124.70%

1982-2011 Cent (97.5% zinc)

$0.01

$0.0059563

59.56%

1965-2011 Dime

$0.10

$0.0231098

23.10%

1965-2011 Quarter

$0.25

$0.0577769

23.11%

1971-2011 Half Dollar

$0.50

$0.1155549

23.11%

1971-1978 Eisenhower Dollar

$1.00

$0.2311110

23.11%

1979-1981, 1999 SBA Dollar

$1.00

$0.0825388

8.25%

2000-2011 Sacagawea Dollar

$1.00

$0.0706778

7.06%

2007-2011 Presidential Dollar

$1.00

$0.0706778

7.06%

Any coin with a metal percent of denomination over 100% is worth more as a metal than as a coin. If you have the space, consider holding onto the pre-1982 copper cents, and perhaps nickels, to take advantage of what time will do to their values if silver’s history is any indication.

While politicians, political commentators, and opinion-yellers are knocking heads and locking horns in Washington, D.C. in an attempt to determine how to spur the economy while cutting the budget deficit, there is an old debate about currency that refuses to die. For the most part, the public isn’t excited about the idea of eliminating paper currency and replacing it with coins. In the long run, however, it would save the government, and in theory the taxpayers, significant money. The Government Accountability Office estimates replacing dollar bills with dollar coins would save $5.5 billion over the course of the next thirty years.

The United States Mint already produces dollar coins. You don’t see them too often. People generally prefer holding money in a wallet rather than carrying a pocket of loose change, and the coin never caught on. The Mint markets the dollar coins as collectible items rather than tools for spending. Other countries, such as the United Kingdom and Canada, have been successful in implementing the replacement of coins for bills of the lowest denomination, but only because those governments stopped circulating paper money. The GAO report takes a look at what effect that might have in the United States.

While over the cost of the next several decades, the cost savings are substantial, there are problems with the first few years of implementation. It would cost more for the government to increase production of dollar coins. The first four years of this period would see a loss rather than a benefit. Some of the costs during this transition time include increasing production of dollar coins in current minting facilities, adding support for dollar coins to other existing facilities, public outreach informing consumers and citizens of the pending change, and adapting the Bureau of Engraving and Printing to print more high-denomination bills. That may not be a welcome message in today’s economic environment, but long-term benefits should always outweigh the short-term setbacks. In practice, those making decisions like these are politicians up for re-election during that four year period.

The government’s assumptions and values used in this study are fascinating. Here are a few:

Because coins circulate more slowly than bills, 1.5 coins will be needed for every 1 bill (note).

Dollar bills have a lifespan of 40 months while coins have a lifespan of 34 years.

There are 3 billion dollar coins in circulation today, with an additional billion in Federal Reserve vaults (not quite a collectible item).

My first question when reading about the study was whether the government considered the increasing trend of turning away for cash payments altogether, in favor of card-based, mobile, and Internet transactions. This was taken to account in an “alternative assumptions” case, and results in a net savings of $4.5 billion over thirty years rather than the $5.5 billion potentially saved in the base case.

Attached to the GAO’s report are comments in response from the Federal Reserve Board of Governors and the Department of the Treasury. Both comments take a critical look at the GAO’s report. The Federal Reserve notes that the cost savings is exclusively from seigniorage, the profit the government makes between the cost of producing currency and the additive value of that currency to the money supply. The Treasury Department notes that new procedures soon to be implemented for producing dollar bills, to be implemented soon, would drastically increase the life of circulating paper, so the savings benefit would be significantly reduced. Also noted in response is the need to consider environmental and societal impact.

Many private businesses will have problems implementing coin-only acceptance of the dollar. Even items as basic as cashier’s drawers and vending machines need to be adapted. The production of coins and bills has changed significantly over the course of this country, but not much in the twentieth century except for the occasionally disappearance and reappearance of the dollar coin, in addition to changes in the metallic composition of coins. I would like to see the dollar bill disappear, but I don’t think it’s going to happen any time soon.

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